By Colleen Schreiber –
FORT WORTH — “Markets are right. Traders are wrong.”
That message was repeated numerous times during a presentation by technical commodity analyst Tony Wolfskill.
Wolfskill was one of two keynote speakers engaged by TCU’s Institute of Ranch Management for a two-day advanced ranch management course on management and marketing. The purpose of the course was to give participants a better understanding of the difference between fundamental and technical traders and the basics that each looks at in making marketing decisions.
Wolfskill has been in the futures business in some form or fashion since 1983. He started out as a livestock analyst for Cargill Investor Services. From there he became a commodity broker for Merrill Lynch and later moved to New York City, where he became product manager for all of Merrill Lynch’s ag and energy business worldwide.
He later joined the company’s research branch, and in so doing became the technical analyst for the company’s commodity markets worldwide. He was the only person who could have the official Merrill Lynch technical opinion on any physical commodity.
Wolfskill is currently employed by Producers Trading Company, a brokerage firm in Fort Worth. He also has his own business, Dixie Research & Trading. In this capacity, he works as a research analyst for other firms on an outsourcing basis. He also works as a commodity trading advisor in the risk management area of the cattle business.
Wolfskill started out as a fundamental trader, but early in his career he realized that he preferred the technicals. He likens the fundamentalists to a supertanker — “slow to react and slow to turn around.”
A technician, he told listeners, is more like a ballerina.
“They get inside quick and run circles around the fundamental guys.”
Wolfskill is a technical analyst, not a technical trader. He chose not to trade long ago, as he felt trading could cloud his judgment and affect his ability to do true technical analysis.
Technical analysis, Wolfskill noted, is the study of price.
“Price is about the only thing we look at, and there is a real specific reason for that. It’s because it’s what we trade,” Wolfskill explained. “We don’t trade numbers, we don’t trade retail demand. We don’t trade acres. We don’t trade weather.
“If the fundamental guys don’t know the stuff we don’t know, and the chart guys don’t know, why worry about it? Price will tell us. Price today reflects the combined knowledge of every single person in the market,” he added. “Everything that is known is already in today’s price right now.”
While price is the only thing technicals look at, Wolfskill said trends are the basis on which technical traders make decisions. He defined a trend as a “succession of higher highs and higher lows or lower lows and lower highs.”
“The trend is our friend. Finding and defining the right time horizon to catch a trend and benefit from it, that’s what technical trading is about.”
The concept of “random walk” is not part of a technical trader’s vocabulary. It is one of the problems that technicians have always had to overcome.
“Random walk says that you can’t really predict the future very well, that markets are not supposed to trend,” Wolfskill explained. “Technical analysts absolutely do not believe that.”
There are stark differences between fundamental traders and technical traders. One basic difference is that fundamental traders use tables, while technicians use charts.
“We use charts because we are humans. Humans are visual animals, and a picture is worth a thousand words. I can talk for days about one chart.”
Technicians use a variety of charts. Many prefer bar charts over candlestick charts, and the kind of information gleaned from daily charts versus weekly charts is quite different.
“Beware of weekly charts,” Wolfskill warned.
Weekly charts, he said, are misleading because the “roll-gaps” in prices distort the true picture.
“Weekly bar charts do not indicate how a market trades,” he noted. “The only thing that a weekly chart is good for is to indicate support and resistance. Support is where a market came down to and held to. Resistance is where a market ran up to or failed on a rally.”
Technical analysts, he added, are only concerned with direction and timing. Momentum charts, he noted, provide some of that information.
There are several types of momentum charts. Relative Strength Indicator and Stochastic are two of the standards. Both are closed-ended, meaning they can’t go above 100 or below zero.
Of all the momentum indicators, Wolfskill said, he mostly prefers Stochastics.
“When I’m trying to determine if a market is overbought or oversold, I want something that is definable. I pick Stochastics because they’re made up of two lines that cross each other. It’s very definable. When those two lines cross, that’s when I know for sure to worry about this or that. An RSI just goes up and down. It never really gives a signal.”
He told listeners never to use one momentum indicator to try and confirm it with another.
“All momentum indicators do the same thing, so they will always confirm each other,” he explained. “If you want to confirm something on a momentum basis, see if you can confirm it on a trend line or in some other chart aspect.”
Computer-generated charts are the standard tool used today in technical analysis. Most computer analysts and traders, Wolfskill said, use moving averages, and like Wolfskill, most focus on 18 and 40-day moving averages.
“Moving averages are the single most important thing in the technical world. Of all the technical indicators in the world, more money chases moving averages than everything else combined,” Wolfskill commented.
“Moving averages are better than the old standard trend lines,” he continued, “because they adapt to the data as opposed to making the data adapt to the trend line.”
Computers, Wolfskill told listeners, have made the job of a technical analyst much easier.
“Before, there weren’t any math guys or quant guys in technical analysis. Back then it was all touchy-feely chart stuff. It was an art form, and it took years to study, years of watching the markets, years of studying how the market reacted to certain things.
“Computer trading is clearly math over market feel. It’s just numbers. Software programmers take numbers and create algorithms to tell them if this did this then give this trading signal. Some funds are so specific that when a signal is hit, when this crosses this, when this price does so and so, it automatically spits out an order to buy or sell and how many,” Wolfskill said.
Computers, he noted, have also allowed technically oriented money, i.e. funds, to invade the cattle futures market in addition to all major markets in the world.
“Some think that fund money is running wild,” Wolfskill commented. “Fund money does move price. Fund money does not create the trend. They are trend followers. There already has to be a trend for them to identify for them to get on board.”
When the market makes a move, Wolfskill said, the job of the funds is to take one third out of the middle.
“They don’t pick a bottom because it already has to have turned up for them to decide to get on a trend. They don’t pick a top. Their job is to take the middle part. Again, funds don’t start trends, but they darn sure finish them. They make them happen.
“Every time the market sells off into the 18-day moving average,” he continued, “the funds should be there to keep buying it and boost the market higher in that trend. We can expect them to keep doing it until an 18-day moving average has been broken with a closing trade under it.”
Some view funds and speculators as bad for the market, but Wolfskill said they play an important role in the futures market. Specifically, they provide liquidity.
“Having speculators there to take the other side, to provide liquidity, is really the only reason that the mercantile has a futures contract,” Wolfskill told listeners. “They will tell you that it’s to make money, but really the only reason the CFTC will let them have a futures contract is because there is a risk management need, so they try to build it to where a speculator will want to trade the market, to take the other side of the risk manager.
“I wouldn’t say we couldn’t have risk management without the speculators,” he added, “but it would be a whole lot harder.”
Volatility, Wolfskill commented, in a way is the trader’s friend because it creates opportunity.
“It gives the hedger, the risk manager, a chance to get something that he might not have been able to get without the volatility, but it doesn’t do any good if you’re not prepared to watch for that opportunity.”
He said that there is seasonality to volatility, and he has charts for every single contract month to prove it.
Fund traders are typically technical rather than fundamental.
“They get on a trend, and when they’re wrong they get out fairly quickly. They don’t fight markets. That’s how they win.”
Funds, he noted, like to trade the feeder market simply because feeders trend well. At least, he said, they trend better than fed cattle.
A question was posed about why more people haven’t used the calf contract.
“My guess is that there is simply not enough information, not enough calf sales reported, for a speculator to base a decision on whether he wants to be bullish. There’s some data, but not enough to get an accurate reflection of the market.
“Plus, how do you take all the calf markets from across the U.S. and link them into a single central price? It’s hard enough with the feeder index.”
Wolfskill told listeners that there are two important kinds of funds, Commodity Trading Advisors and hedge funds.
“CTAs grew up in this computer environment and they learned how to do mathematical trading,” he noted.
Hedge funds, he said, came out of the equity world as “non-traditional” commodity traders.
“There are onshore and offshore hedge funds. An onshore hedge fund can only have 100 credited investors. It’s very limited, mostly the very big boys, the high-tech guys out of the stock market.”
Many hedge funds, Wolfskill also said, are oriented toward long-term position trading.
“In the current commodity bull cycle, this relates to being long. Look at the corn market right now. The large speculators in corn are still huge long. Most are hedge funds. They’re willing to buy at $3 and still own it at $2.20. They’re long-term players.”
Hedge funds, he pointed out, typically don’t get into the fed cattle market because cattle are only fat for a relatively short period.
“Gold, oil — they can hold those commodities forever.” The funds that typically play the cattle futures are the CTAs. Wolfskill guesstimated that there are some 1500 to 1700 registered CTAs, though the number varies a lot. The majority of those traders, he said, trade the bigger financial futures market.
The CTA business, he noted, can be lucrative. CTAs make their money two ways. They take a fee for the amount of money they hold, usually one to two percent. That amount comes right off the top. They also get a quarterly incentive fee, which can range from 15 to 25 percent of the new high quarterly profits.
“We’re talking about billions of dollars trading in the future markets from this single fund group of traders,” he told listeners. “In the first quarter of this year the top 25 of the 1500 or 1700 funds raised seven billion in new money. That’s money they now have to trade with.
“Say they have 50 markets to split that money up in, the cattle market is probably in the middle of the pack. They might have $100 million to throw at the cattle market. That’s why the funds have become more and more important. When they’re ready to go, watch out for them, because in the short run they can move price 100, 200, 300 points before they’re done doing what they want to do.”
There is a specific segment of the fund business that is “long only” funds, Wolfskill said. These are the Goldman Index traders. These “long only” funds have a golden rule: “always long, never short and never out.”
“The only reason they’re ‘long only’ funds is because someone at a very senior level said he wanted exposure in commodities. They can’t go out and physically buy commodities, so they buy futures contracts.
“These ‘long only’ funds don’t care about the next quarter or the next year; they’re concerned about the long haul. They’re in it to make money over a long time period. They are huge players, and they’re getting bigger.”
Wolfskill wrapped up his presentation by reiterating some of the basics he uses as a technical analyst to come up with projections.
“Keep it simple,” he stressed. “You can overanalyze this stuff. There are so many indicators, and you can always find something that will tell you what you want to see and something that argues with you.
“I worry only about direction and timing. What the chart says about direction will have a lot to say about the way the funds are trading,” he explained. “If I know their position when the market begins to trend, I’ll have a handle on what they’re going to do.
“Timing tells me something about whether we’re overbought or oversold. Are we chasing something that is going to peter out or something that is just getting started?”
Wolfskill told listeners to always start with the big picture and work down to something manageable. For him, that means first looking at the weekly adjusted chart.
“I want to know how the market is trading, not just what the highs and lows are, and I want to know what the long-term trend is.”
He uses two tools in his long-term model to get some perspective on the market. He uses DMI, directional move indicator, and momentum to determine if the cattle market is in a bullish, bearish or choppy kind of environment.
Though he prefers stochastic over momentum on daily charts, it’s just the opposite on weekly charts.
“In this situation I’m not worried about overbought and oversold. I’m just looking at whether we’re bearish, bullish, positive or negative,” he explained.
DMI is the computer’s way of figuring out whether the trend is up or down.
“It gives me two lines that tend to cross,” he noted. “The values of the numbers aren’t important to me. Is the blue line over the red line or the red over the blue? That’s what I’m interested in, because that tells me if it’s trending mode up or a trending mode down.
“Because it’s on a chart, it’s simple,” he reiterated. “I don’t have to pour over it. I don’t have to look at a bunch of numbers. I don’t get eye strain looking at it. I can glance at it from five feet away. All it does is it gives me a bias towards the bigger picture.”
In addition to the direction portion of his model, he looks at momentum.
“In order to have a bullish outlook, I need the direction (the trend) to be up and the momentum to be positive,” he explains.
Wolfskill said he tends to break things down into short-term, near-term and long-term, though he noted that technical analysts don’t really think long-term. For him, short-term means from now to a couple of days out. Near-term is generally three days to three weeks out, and long-term is anything beyond three weeks.
“I use these three timeframes because that’s basically what is seen on a daily chart,” he noted.
“I look at three charts. The weekly gives me the bias. The daily chart is the bread and butter chart. It’s the chart most people trade on. Finally, I use the hourly chart to determine if the market is overbought or oversold in the short run.”
Wolfskill concluded his remarks by reminding listeners that the key to technical analysis is in believing the charts.
“Markets are right. Traders are wrong,” he reiterated. “This only works if we don’t question it. If we don’t take the signals, the machine breaks down.
“Psychology does come into play,” he added, “but that’s why you don’t question it. If you do, you talk yourself out of it every time. That’s the biggest problem with trading today.”
As for predictions on the cattle market, Wolfskill offered this outlook:
“There’s a good possibility that the $103.60 fed cattle top seen in October 2003 could very well be the top of the fed cattle market, but there is nothing yet to confirm that we’ve rolled over in a big way,” he told listeners.
Finally, because he used to be a fundamental guy, Wolfskill offered one other thought.
“The reason this market has gotten so good, all commodity markets in general, is because of home refinancing. In my mind, that is the single most important factor. The average housewife has about $175 to $200 extra in her personal extra month-in, month-out budget because her house payment is smaller. What do you do with a little extra money? You go out to eat and see a movie.”
Source: Livestock Weekly